Friday, August 17, 2012

Jason Brennan makes an interesting - although I think ultimately wrong - argument about Bastiat and Keynes. He writes:

"Bastiat demolishes populist arguments. To counter Bastiat, you need
something like Keynesianism. You need to argue for such things as
“animal spirits” and “multipliers”, plus you need to prove, empirically,
that the multiplier is large enough to counter Bastiat’s objection."

So Bastiat's naive libertarianism answers a naive populism, and that opens the door for Keynesian arguments.

Sort of, but I have a hard time thinking about Bastiat like this considering it was Bastiat who wrote:

"As a temporary measure in a time of crisis, during a severe winter, this
intervention on the part of the taxpayer could have good effects. It
acts in the same way as insurance. It adds nothing to the number of jobs
nor to total wages, but it takes labor and wages from ordinary times
and doles them out, at a loss it is true, in difficult times."

He is not exactly an enemy of counter-cyclical fiscal policy. It's true he doesn't go the full-Keynes, but I don't think it's entirely correct to say that Keynesian arguments are used to "counter" Bastiat. That doesn't give Bastiat enough credit.

But it is worth thinking about Keynes as presenting the argument that responds to the conditions that Bastiat provides. Bastiat talks about the uses of resources that stimulus is taken from. As he nicely puts it - money doesn't come down "miraculously on moonbeams" when the legislature passes a spending bill.

And this is where Keynes agrees with Bastiat (he doesn't counter him) and steps in. Keynes notes a couple important things. First, that investment is the critical activity, not consumption (see this point in his criticism of underconsumptionist theories), second, that investment is dictated by expectations of future profits, and third that those expectations of future profits are compared to an interest rate that is determined by liquidity preference and not the supply and demand of loanable funds. Since the interest rate limits investment but is determined by liquidity preference, negative demand shocks that increase demand for liquidity can leave idle resources and lower investment levels - which provides a perfect opportunity for the sort of crisis stimulus that Bastiat agrees with, and which does not draw resources away from other activities.

Can you explain why interest rates being determined by liquidity preference is important here?

Couldn't a demand shock cause an economic contraction even if interest rates are set by the supply and demand of loanable fund ? For example if the demand for funds decreases as people don't want to borrow to invest and at the same time supply of funds increases as people don't want to spend on consumption then the equilibrium interest rate could be less than zero with the consequence that both I and C would fall. Wouldn't Keynsians call for stimulus in this situation ?